The Fitted Exercise Factor represents the output from the calibration process of the
Lattice Barrier Model. The sub-optimal exercise factor represents the average
amount of gain recognized in your firm's historical exercises. Exercises that occur
prior to the full term of the option (usually ten years) are considered to be early
exercises that are sub-optimal because the option holder does not realize the full
potential gain of the option that could be achieved by holding the option to
expiration. This factor is applied in the lattice formula to dictate the price point at
which the option holder can be expected to exercise an outstanding option based
on historical patterns inherently derived by the system in a calibration process.
Assumed and Modified Grants are not included in this calculation.
To calculate Fitted Exercise Factor:
1. Enter an as-of date. The default is the current date. However, the as-of
date should be changed to the end of the reporting period or last day of the
period you are analyzing. You may also select an as-of date by clicking on
the calendar icon and selecting a date from the calendar.
2. Award Type Filter Selection: This filter allows you to generate a Fitted
Exercise Factor values for one or multiple option-type awards. The choices
are NQ, ISO and SAR. The default checked selection is NQ and ISO.
Checking the Award Type allows you to customize the Fitted Exercise Factor
value outputs for one or a combination of award types.
3. Click the Calculate Button. The fitted exercise factor is calculated and
displayed to the right of the calculate button.
To save the calculations:
- Click the Save to Selection button. The historical exercise factor
calculation is removed from the page and ‘moved’ to the Historical
Exercise Factor Parameters section at the bottom of the page. The
selection also displays the award type for which that value is applicable.
Note: This information can also be seen on the Your Selection
page.
To remove saved calculations:
- Click the red Remove ‘X’. However, be aware that there is no confirmation
before it is removed.
To create the Excluded Grants Report:
- Click the Excluded Grant Report button. A comprehensive audit report
displaying the grants that meet the filtering criteria but were excluded
because they were assumed and/or modified will be generated. MPA Grants
will not show up under this report.